Musk's Stalling Leads Mexico to Second-Guess Massive Tesla Factory

(Bloomberg) -- There’s a great big void in the northern Mexico desert where Elon Musk said early this year Tesla Inc. would build its next massive car plant. Locals who were ebullient only months ago now are tempering expectations.

Construction of the Nuevo Leon factory, which had been slated to make Tesla’s cheaper next-generation vehicles, is delayed due to Musk’s misgivings about the global economy. Other problems, including permitting delays and a dearth of infrastructure, also have plagued the process.

Mexico has sought to allay concerns that the plant might be canceled. This week, the state government approved $153 million in incentives for basic infrastructure such as roads and water treatment, as well as a reduction in payroll tax. Days earlier, the nation’s environmental regulator granted Tesla a land-use permit.

Even so, Tesla will require several more local and federal permits, including from the Energy Regulatory Commission, to build and operate the Nuevo Leon factory, and additional infrastructure must be developed.

When Tesla settled on the Nuevo Leon site only nine months ago, politicians and executives hailed it as a paragon of nearshoring — the idea that international companies will set up much more of their production in Mexico to be closer to the US. The company’s investment in the country is expected to reach $10 billion over multiple phases.

Nuevo Leon Governor Samuel Garcia envisioned Tesla shipping the first vehicles from its Mexico facility as soon as next year. Now, it’s unclear whether the plant will open even in 2025. The factory site is an empty stretch of cactus-ridden land along the highway, and the only indication Tesla is coming is a welcome sign from a local realtor peeking through a barbed-wire fence.

Musk said in October that while he still plans to build the plant, the chief executive officer was reluctant to move forward at “full tilt” because of high interest rates. In a more recent interview, Musk said that Tesla will produce its next-generation entry-level vehicle at its Texas factory first, since the Mexico facility won’t be ready in time. The battery-sourcing strategy for Tesla’s Mexico factory remains unclear.

The facility could be up and running by late 2025 or early 2026, reckons Scott Chen, the CEO of Yinlun TDI LLC, the California-based subsidiary of the Chinese manufacturer. His company feeds components including heating and cooling parts to Tesla’s Austin plant, which assembles Model Y sport utility vehicles and the new Cybertruck.

Chen expects to supply Tesla’s Nuevo Leon plant once it’s operational, and Yinlun plans to almost double its number of employees in Mexico by opening a second plant. Iit could even open a third.

The executive is still hopeful that Tesla will provide an economic jolt. “I’ve heard that they could be slowing down a little bit,” he said. “But right now we’re pretty busy supporting Austin.”

For the promise of nearshoring to be fully realized, Mexico also will have to overcome internal divisions. Much of the US investment headed to Mexico is likely destined for the northern part of the country, which is already relatively wealthier. That’s created tension, with President Andres Manuel Lopez Obrador, or AMLO, jabbing at local leaders who aren’t helping him funnel more money to the south.

Before Tesla announced its intent to build in Nuevo Leon, AMLO questioned the state’s ability to supply companies with water. The EV maker went ahead with its site selection, but requested that Nuevo Leon improve the availability of electricity, water and transportation before starting construction.

The issues are “a shame, because Nuevo Leon was known as the entity for nearshoring,” says Gabriela Siller, director of economic analysis at Banco Base. “There have also been many announcements that haven’t materialized and that is beginning to disappoint.”

Antonio Lopez Vasquez, a Nuevo Leon resident, worries that AMLO could make it difficult for the state to receive funding for infrastructure and other necessities. Yet he ultimately sees Tesla’s arrival as positive, “in terms of the new companies or industries that are establishing themselves in the state.”

Another resident, Laura Cantu, is hopeful the Tesla plant will be a boon for the local economy. She points to the example of Kia Corp., which opened a plant in the municipality of Pesqueria in Nuevo Leon in 2016.

“When a big company like that comes, they bring with them all of their suppliers, and they come with a lot of impetus to grow and install industries here, it’s very beneficial,” Cantu said.

©2023 Bloomberg L.P.